Following the typical supply and demand economics model, many people expected this year to be the one when the U.S. cattle herd would start rebuilding, as cattle prices move higher and heifers are retained.
Producers were looking forward to weaning and marketing those higher-priced calves this fall. Mother Nature turned the tables, however, as widespread drought in the Midwest, Plains and Western states limited pasture availability and wilted the U.S. corn crop to almost devastating numbers.
"The drought cuts two ways for the cattle industry, and they both have to do with feed prices—for forages and for feed to grow out steers and heifers for beef," explains Chris Hurt, an agricultural economist at Purdue University.
Retaining heifers or expanding a herd appears to be the furthest thought from the minds of farmers impacted by drought. Many are just hoping to make it through a while longer, and will sell calves for cash flow rather than wait for market highs. For cattle producers like Ed Greiman, a cow–calf and feedlot operator in Garner, Iowa, it is likely that a revision of their budgets will be needed for their banker.
"We reduced our budgets for the bank, and we see the cow–calf side getting hurt. It will take $100 per cow more in feed for the next 12 months compared to last year," he says. Greiman also feeds 2,500 head in monoslope facilities, but says that he plans to keep the feeding pens full. "We only had one bad turn before corn went up. We’ll find a way to get through and buy extra cornstalks and other alternative feeds to finish cattle out," he adds.
Other producers are also encountering challenges in maintaining or extending financing to keep livestock. With banks unwilling to take risks on livestock loans, some are not even considering them.
Lynette and Steve Beiser run a large family farm in Butler County, Ohio, with more than 3,000 acres of grain and 1,000 head of cattle. Lynette says that the banks this year are being uncooperative. "This is the first year we have noticed reluctance to loan money for raising livestock. We will be forced to sell our cattle month to month for cash flow [due to grain deficit] and eventually get out of the cattle business,"
If feeders continue to have limited funds to purchase cattle, producers may want to expand their selling options for calves this fall. Consider direct marketing to feedyards or other buyers, through sale barns, directly to an order buyer or selling cattle online.
Early fall run. For those who can hold on, there may be a silver lining this fall. With the drought, this year’s typical fall calf run actually occurred in the summer, says Derrell Peel, Oklahoma State University livestock economist. Fall calf prices may trend up since the glut of movement occurred earlier.
"Short pastures meant that calves headed to feedlots sooner than normal. It also meant that the cowherd was culled more than normal and heifer retention declined," says Ron Plain, University of Missouri agricultural economist.
Increased cow slaughter and reduced heifer retention will mean a smaller calf crop in 2013, and consequently tighter beef supplies and higher beef prices. "Overall, the economics of cattle prices are good," Plain says. "If the drought weren’t so widespread, I’m sure we would be saving heifers. However, a very large share of the nation’s pastures are in bad shape."
With the liquidation this summer, market reports suggest that cow prices dropped from 80¢ a pound to closer to 50¢, due to the rush of cows coming to market in late July, Hurt adds. "The drought is so widespread that those cows are going to slaughter rather than finding other farmers or ranchers who want to take them home. Liquidation of some cows will eventually reduce the meat supply by late 2013. So cattle prices and retail beef prices will probably set new record highs each year in 2013, 2014 and 2015."
Sell or keep? For those who still have calves to sell this fall, the question of retained ownership may come to mind. With the current feed price situation, however, 2012 may not be a good year to do this.
"Retained ownership worked well last year, but not so well this year," says Shane Ellis, an Iowa State University livestock economist. "You have to ask yourself if it is better to risk it yourself or give that risk to someone who can get a better cost of gain."
Typically, those retained calves graze longer to put cheaper gains on before heading to the feedyard. But with short pastures, those calves would need to go to the feedyard earlier in order to be efficient. High corn and soybean meal prices will sharply drive up the cost of finishing cattle in the feedlots.
When feed prices are high, feedlot managers automatically bid less for younger calves coming into the feedlot. Those lower calf prices mean that the owners of the brood cows (mother cows) get lower prices—forcing losses on them that will further encourage liquidation of the cowherd.
For now, Greiman says, he’ll continue to "play small ball" just to get through this year. He hopes that next year’s forage and grain situation will improve for livestock producers, giving them a chance to make some bigger plays.